Almost halfway through 2023, and the environment for private equity remains difficult on multiple fronts—a noticeable shift from the record-setting stretch seen just a couple years ago.
Fundraising has been challenging for most. Dealmaking has slowed considerably. Portfolio valuations are still in flux. And a drumbeat of blistering news coverage continues to question the industry’s value proposition and influence over large swaths of the economy.
The change in operating conditions since 2021 has put pressure on firms to manage their LP relationships ever more closely. For those who do this well, the strength and depth of LP relationships is a key part of winning mandates in a fiercely competitive environment. Effective communications, not just returns, are a central pillar to the GP-LP relationship.
The 2023 Edelman Smithfield LP Survey on Private Equity—which canvassed the views of nearly 500 LPs across Asia Pacific, Europe, the Middle East, and North America—provides rich insight into what LPs are seeking and how the industry can develop an all-weather communication strategy.
Here are the top takeaways:
1. Double down on brand building
When deciding which fund to allocate to, nearly 40% of LPs surveyed said that the reputation of a private equity firm is more important than investment returns. Clearly, investors want to commit to successful funds, but not at any cost. They see their own reputation as intrinsically linked to that of the GPs. As an industry, private equity has historically equated no reputation with a good one; however, the same cannot be said today. Firms that do not engage and develop their reputation are more vulnerable to being defined by other parties. Strengthen the perception of your brand and ensure that you have planned in advance for any potential reputational hurdles.
2. Take ESG to the next level
Despite the ESG backlash in many parts of the world, LPs’ expectations continue to grow in this area. Beyond detailed reporting and negative screening, investors now want to see ESG incorporated in a much more sophisticated way. When deciding which fund to allocate to, 60% of those surveyed said it was important to see ESG-linked financial incentives for investment teams. And almost 60% of investors said third-party assessments are important, meaning GPs can no longer mark their own homework. Make sure to show how your organization is structured to achieve ESG outcomes to meet investor expectations today.
3. Embrace social media
If there was ever any doubt over whether investors paid attention to social media, we now have a clear indication of just how much it matters. When deciding which fund to allocate to, 94% of investors said that the social media profiles of key private equity firm personnel are important. Ensure your firm’s company channels are not only active and informative, but also guide your team members towards maintaining appropriate content of their own. For more guidance on how to take your firm’s social media game to the next level, check out Edelman Smithfield’s webinar and resources here.
4. Show how your strategy fits the environment
The current economic climate presents significant challenges to both private equity firms and the investors that commit to them. Limited partners need assurance that the funds they commit to are deploying the right strategy for the environment. Nearly 1 in 5 investors surveyed said the funds they have invested in have not effectively communicated that they have the right investment strategy in place to generate adequate returns in an economic downturn. As fundraising becomes constrained, these impressions will play a vital role in shaping perceptions around the firms meeting or falling short of their targets. Use all channels at your disposal to show how your firm’s strategy evolves through different legs of the economic cycle.
While the path forward remains foggy, insight-driven communications can help private equity firms navigate changing environments. The industry should continue to embrace rigorous communications programs as LPs increasingly look beyond returns when allocating capital. Grounded in data, GPs can confidently embrace new platforms and tailor their communications to LPs’ evolving needs.
Jess Gill is a Director at Edelman Smithfield in London
Tim Quinn is an Executive Vice President at Edelman Smithfield in New York